While IR35 reform is now in play in the private and public sectors, that’s not to say HMRC will stop investigating contracts retrospectively, focusing on a time when contractors carried the liability.
Judging by the tax office’s most recent activity, it certainly looks as though HMRC will continue to pursue contractors despite the roll out of IR35 reform.
For example, last month, on 25th and 26th of March, two contractors were contacted by the tax office regarding their IR35 compliance.
The contractors, both of whom are now being supported by Qdos, find themselves caught up in IR35 investigations focusing on contracts held in 2018/19 and 2019/20 respectively.
Even though the rules have now changed? Potentially, yes.
In the lead up to IR35 reform, much was made of whether HMRC will launch IR35 investigations into contractors going forward. This is because for engagements that started on or after 6th April, the tax office will investigate fee-payers, not contractors - unless the client qualifies as a small company, meaning the contractor still carries the liability.
However, what has often been overlooked in recent months is that HMRC have not ruled out investigating contractors. True, the risk has been transferred to businesses in the majority of cases, but HMRC are likely to continue opening IR35 enquiries into contracts completed before reform was enforced.
While the transferring of the liability suggests that contractors will not be subject to IR35 enquiries going forward, the reality is that HMRC can still open an investigation into a PSC regarding an engagement that took place before reform.
HMRC have also stated on numerous occasions that they will not open an IR35 investigation into a contractor based on a change in status as a result of the off-payroll reform unless they “suspect fraud or criminal behaviour.”
This was made clear in the set of ‘Compliance Principles’ published by the tax office in February, ahead of the recent changes:
“We have also committed that we will not use information acquired as a result of the changes to the off-payroll working rules to open a new compliance enquiry into returns for tax years before 2021 to 2022, unless there is reason to suspect fraud or criminal behaviour.”
In a sentence, that contractors are still at risk of an IR35 investigation despite the arrival of reform.
History tells us that most IR35 cases are retrospective regardless, while HMRC can scrutinise a contract that finished up to 6 years ago. That being said, the tax office can look beyond that if they have an inkling of deliberate foul play.
Additionally, the fact that HMRC are of the opinion that only one in ten contractors who ought to be working inside IR35 were (before private sector reform) suggests that they suspect widespread non-compliance.
All of this means contractors need to be aware of the risks that IR35 still poses, even if they aren’t the party responsible for assessing status following reform. As a result, IR35 insurance is set to remain a vital product for contractors over the next few years.
Having carried out over 150,000 IR35 status reviews since the legislation was introduced and saved contractors over £35m in potential tax liabilities, Qdos are a leading provider of award-winning services, including IR35 insurance.
For more information, please call 0116 262 0999 or email [email protected].
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